Here Come The Financials
Financial sector funds have
staged a smart turnaround, riding a flood of institutional cash into battered
bank and insurance stocks. But what about those grumpy old men at the Fed?
In today’s monetary
environment, it’s doubtful that interest-rate sensitive stocks can sustain a prolonged climb into
new high ground. But many of these issues still can advance a long way to go before
testing their old highs.Â
The Federal Reserve
has hiked official short-term interest rates five times, raising the federal
funds target rate to 6%. Most market observers see more tightening ahead — to
the tune of at least
50 basis points on the fed funds. The fed funds rate governs overnight loans between member banks of the Fed. It’s the central bank’s primary tool of monetary policy.
Meanwhile, the yield curve
has largely
inverted. The yield on the 30-year Treasury stood at 5.98% as of the stock
market close on Friday. That’s two basis points below
the fed funds.Â
So what? say some
investors. Institutions are clearly betting that financial stocks have
discounted the hawkish Fed. Note the progress insurance sector funds have made
as gauged by their short-term vs. long-term relative strength scores.Â
After touching a 52-week low at 25.92
on March 8, Fidelity Select Insurance
(
FSPCX |
Quote |
Chart |
News |
PowerRating) has come back strong,
logging a Net Asset Value of 32.35 after Friday’s close. The fund made its
52-week high of
Fidelity Select
Insurance earned a 99 relative strength rating over the past week and month,
meaning the fund outperformed 99% of all funds in the FundMovers.com database
over those time frames. That compares with a 12-month RS of 2, indicating the
fund has lagged 98% over the past year. That’s quite a turnaround.
Check out the list of top-performing
mutual funds over the past week on the FundMovers Indicators section. (Just click on the “Indicators” tab at the top of this page.) These
turnarounds stand out like a sore thumb.
Take Century Shares
(
CENSX |
Quote |
Chart |
News |
PowerRating),
another fund loaded with insurance stocks. Century Shares
logged 99 RS scores for the past week and month. That compares to a 12-month RS of 1, the worst rating
possible for that time frame.
Timing Models Raise
Yellow Flags
The FundMovers.com Intermediate-Term Timing Models suggest
caution in this interest rate environment. The Nasdaq
momentum modem is signaling long. In other words, buy shares in the Nasdaq 100.
But the interest-rate model is signaling short. In other words, sell short the
Nasdaq 100. Click the “Timing Models” tab at the top of this page. Then go into the intermediate models.
What does this mixed signal mean? Hedge fund manager Mark Boucher, who developed
the intermediate-term timing models, said Friday: “Right now, you’ve got a game of chicken between the
Nasdaq and the Fed. And Fed’s going to win.”
The upshot for traders: You can trade
long in the hottest sectors if you keep a close watch on your stops. Keep
a foot by the exit. And
don’t over-expose. Stay off margin.
More Hard Charging
Funds
The revival in
financials isn’t limited to insurance sector funds. Check out Rydex Financial
Services Inv
(
RYFIX |
Quote |
Chart |
News |
PowerRating) and Rydex Financials Services Adv
(
RYFAX |
Quote |
Chart |
News |
PowerRating),
which last reported biggest holdings in money center banks, brokerages and
insurers.
Titan Financial
Services
(
TITNX |
Quote |
Chart |
News |
PowerRating), heavy in brokerage stocks according to the most recent
holding reports, has 98 and 99 RS ratings for the past week and month,
respectively, vs. a 12-month RS of 52.
FundMovers’ list of last week’s top performing
funds tells the same story. The Financial Sector SPDRs
(
XLF |
Quote |
Chart |
News |
PowerRating) were the No. 2
performing exchange-traded fund for the week, following the Internet HOLDRs
(
HHH |
Quote |
Chart |
News |
PowerRating).
Stocks Surge Off
the Bottom
Behind the direction
of these funds, of course, is a recovery in their stock holdings.Â
Take Bank of America
(
BAC |
Quote |
Chart |
News |
PowerRating).
The big bank holding company had advanced 29% to 54 5/8 by Friday’s close from a 52-week low of 42
5/16 on March 10. The stock began its recovery in earnest on March 15 as the
share price broke decisively higher on strong volume. Bank of America shares
gapped up on even brisker trade on March 16 and haven’t looked back. Still, the
stock is well below its all-time at 88 7/16 on July 13, 1998 or its 52-week high
of 76 3/8 set on July 19, 1999.
For people who trade
stocks using William O’Neil/CANSLIM tactics, the pattern resembles a
follow-through day with March 10 representing the bottom and March 15 being the
confirmation session. Â
Many financial funds reported big
positions in American International Group
(
AIG |
Quote |
Chart |
News |
PowerRating). The insurance giant made bottomed
on March 8, rallying off an intraday low of 78 9/16 to close up on stronger-than-prior
session trading volume, a classic bottom reversal. From there, strong volume has come
into the advancing stock. AIG closed Friday at 107 5/8, within striking distance
of its Jan. 14 all-time of 114 1/2.
Â